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The MLM industry has, during the last 20 years, developed positive working relationships with regulatory agencies such as attorneys general and the FTC (Federal Trade Commission). There was a time, however, back in the 1970s, when the FTC challenged the legitimacy of the direct selling industry as being a pyramid scheme. They accused Amway of operating illegally and Amway prevailed in a very famous 1979 case [below] where it was held that the network marketing industry is a legitimate business model and the business opportunity is not a pyramid scheme.

No legal ruling has been more impactful on the direct sales industry than The Landmark Amway Case.

Afterwards, regulatory agencies and the industry went quiet until the 1990s when it was questioned whether or not product-using consultants were a legitimate end-destination for products or whether consultants were simply retail customers. There has been an ongoing tug of war between the MLM industry and the FTC in terms of determining whether or not personal use should have an impact on a company’s legitimate operations. The industry, with the cooperation of attorneys generals in more than a dozen states, were able to amend legislation in those states to recognize that personal use of product by distributors is a legitimate end-destination, just as if it were a retail sale.

More recently, about four years ago, the FTC decided to update its Business Opportunity Rule [below] (which is more oriented toward franchises or programs that require substantial investments). The proposed draft would have completely encompassed direct selling companies to the point that it would have been onerous to offer a MLM, network marketing, direct selling opportunity in the marketplace.

Read the article “FTC Exempts MLM/Direct Selling from FTC Revised Proposed Business Opportunity Rule.”

For instance, one of the proposed rules would have stated that if you approached your neighbor, for instance, about joining a network marketing company then you would have to wait a week before returning to follow up with them on their decision. This waiting period would not have been very conducive to offering a business opportunity, and therefore, not very practical for the network marketing industry. The industry responded to the proposed rule. Over 17,000 comments poured into the FTC from MLMLegal.com, the DSWA, the DSA, distributor associations, and direct selling companies indicating that they thought the rule was overreaching.

The net result gave rise to the FTC amending its proposed rule to carve out an exception for direct selling/MLM companies. Direct selling companies would not be included in the rule. This was a victory for the industry since it didn’t want onerous rules inhibiting the more than 15-16 million people in the U.S. industry from operating a legitimate MLM business.

At this time, we are in a fairly good regulatory environment. Every direct selling company at any one time, however, is being sent questions of inquiry from regulatory agencies such as the Federal Trade Commission and attorneys general. This is simply part of doing business in this industry. So, when you see that a company has been sent inquiries or investigative demands from regulatory agencies, it’s not always a good idea to jump to conclusions about the legitimacy of its operations. The regulatory agencies are just doing their job.

In the end there is always a balance of regulation that needs to be reached. Direct selling companies do it best when they take some initiative on their own to promote consumer protection by looking out for both their consumers and consultants. The reason the FTC ratcheted back on the business opportunity is because of the large influx of comments that flooded in from industry leaders, including MLMLegal.com and the DSWA. Industry-leading groups have the ability to mobilize large groups of people who are passionate about the network marketing industry and that helps our industry serve a great purpose.

MLMLegal.com keeps you updated on changes being made in the direct sales regulatory environment. Visit our network marketing news pages or MLMLegal.com for the latest information on the network marketing industry.

If you are interested in attending the Starting and Running the Successful MLM Companyconference visit our conference page, view our speaker list, or get more details. All executives/owners of direct selling companies are welcome to attend. Call 800-231-2162 to register.

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The issue of depth of levels seemed to be a major focus prior to the internet and other non-postal (mail) means of communication. In the late 1980’s, the U.S. Postal service examined the numbers of compensation plan levels to make a determination, whether or not, in its opinion, the depth of levels created a “lottery” element under U.S. Postal lottery laws, that forbid payment based on chance.

Various cases and consents sorted out a safe harbor (at least from the U.S. Postal Office standpoint) for at least four levels (not necessarily agreed to by the direct selling industry). Separately, the Postal Service looked for evidence of “supervisory requirements.” Most companies adopted specific supervisory requirements of sponsors to demonstrate some managerial activity by distributors.

For the past 25 years, little recruitment activity is conducted by U.S. mail and it has been a long time since the U.S. Postal Service has expressed a serious interest in this subject. The issue of levels in a company’s compensation plan has not been the focus of the FTC or state attorneys general in the enforcement of pyramid laws. Instead, the focus for the last two decades has been on the whether or not product/service is purchased in reasonable amounts, the presence of anti-inventory loading and “buyback” rules and an emphasis of sale of product/service to the “ultimate user” as opposed to an emphasis on mere recruitment of new distributors whose primary motivation to make payments or purchases is to qualify in the income opportunity.

Watch the video for a detailed explanation by Jeff Babener, Editor of MLMLegal.com. View all of our new videos and more on our new and improved website: MLMLegal.com!

MLMLegal.com is bustling with educational content for direct sellers and startup/existing MLM companies! Be sure to visit us often!

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Vocal critics are abundant in the direct selling industry, but the positives drown out the negatives. It’s not hard to find a loud voice criticizing the direct selling industry through a quick Google search. And it is true… there are many pyramid/Ponzi schemes, primarily internationally based, that parade themselves as MLM/direct delling… and they are not. They are merely pyramid headhunting recruitment schemes that often use bogus products and services as an excuse to move money. The entire emphasis of such organizations is to cause investors to pay money and cause others to do the same, with a thin veneer of an actual product or service. In fact, the revenue to pay commissions instead comes from distributor payments and not sales to the ultimate user.

Despite this, the facts remains MLM and direct selling are a major part of the fabric of commerce. Statistics on 2014 sales, compiled by the World Federation of Direct Selling Associations, indicate global sales of $183 billion and 100 million distributors. In the U.S., there are 18 million distributors posting $35 billion in sales. Numerous direct selling companies are traded on the NYSE.

Many direct selling companies have histories dating back to the 1800s (see our MLM company profiles page to read over 700 MLM company profiles). Avon, alone, dates back 130 years. Companies like Avon, Mary Kay, and Tupperware have long and credible company histories and support thousands of households in the U.S. and internationally. Network marketing has a lengthy history of reputable companies. This industry supports millions of independent consultants in the United States and abroad.

Finding a Good MLM Company

How do you find a good MLM company for you? There are ways to make sure that a direct selling company is a good business and ethical. First, contact the industry association websites, such as the Direct Selling Association (DSA), to see if the company is a member and if they abide by the DSA’s Code of Ethics.

Secondly, if you’re considering becoming a part of a startup network marketing company, learn how to recognize some red flags. Is the company offering a tangible product or service? Make sure that the company offers a product or service, and not something intangible, such as prayers or wishes. Does the company ask for an unreasonably-high investment to join? Startup kits average anywhere from $50-$150. If a company is asking for $500 for their startup kit, perhaps you should begin asking more questions. This alone is not a sign of a company operating illegally, but can be a sign to look for additional clues for questionable practices. Does the company focus its mission on primarily recruiting new members and not focus on the sale of product (or service) to the end consumer? A legally-operated MLM company will have a primary focus of selling products (or services) to the consumer, not just in recruiting new consultants.

Be sure to investigate any opportunity that you are considering joining and due your own due diligence. And, if you are starting your own network marketing company, it would be wise of you to hire a credible MLM attorney that specializes in direct selling law.

And probably your best educational resource: check out the hundreds of articles, videos, company profiles, etc. at MLMLegal.com.

If you are interested in attending the Starting and Running the Successful MLM Company conference visit our conference page, view our speaker list, or get more details. All executives/owners of direct selling companies are welcome to attend. Call 800-231-2162 to register.

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This newsletter offers recent news, videos, company profiles, and weekly articles delivered to your inbox on a timely basis. Each newsletter contains top news stories in the network marketing industry, the most recent MLM scam alerts, timely articles on the direct selling industry, and so much more.

Make sure you’re not the last to know about top MLM news stories, or to hear about the latest scam reports. Our timely headline reporting will keep you up-to-date on stories that affect everyone in the network marketing industry.

We will also make sure you receive a “Video of the Week” on industry educational topics, such as distributor education, industry Q&A, executive interviews, MLM startup, and pyramid schemes.

Each newsletter features the profile of a direct selling company, like Avon, Mary Kay, and Amway, or perhaps a startup multilevel marketing company that you haven’t heard about yet! MLM News Global also highlights two featured articles on industry-related topics, such as pyramid schemes, compensation plans, recruiting, lead generation, legal analysis, software, and more.

The MLM News Global Newsletter is presented by industry educator, MLM legal expert, and network marketing business consultant, Attorney Jeff Babener.

Sign up today to receive valuable MLM, network marketing, direct selling content, an imperative to anyone in the direct selling industry. Join our newsletter today!

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If you are interested in attending the Starting and Running the Successful MLM Company conference visit our conference page, view our speaker list, or get more details. All executives/owners of direct selling companies are welcome to attend. Call 800-231-2162 to register.

Our next Starting and Running the Successful MLM Company Conference takes place in Las Vegas. View our conference flyer and speaker list online.

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MLM Expert Attorney, Jeff Babener offers ten FTC vs. Vemma litigation bullet points.

On August 17, 2015, the FTC filed a complaint in U.S. District Court in Arizona, seeking a permanent injunction against Tempe-based Vemma International Holdings, Inc., a long-time direct selling marketer of health-related products. The FTC was successful in obtaining a temporary restraining order, which shut the company and froze its assets. Further proceedings for a hearing on a preliminary and permanent injunction and other relief were set to the future.

Such a scenario has been a common approach for the FTC. The most recent actions resulted in permanent injunctions against BurnLounge and Fortune Hi-Tech Marketing. For a summary of the most significant federal actions during the past few decades, please see:

Herbalife: What Short Sellers Missed on the Way to the Press Conference…

Jeffrey Babener (2013)

The primary accusation against Vemma is that its program focused on recruitment rather than sale of product to the ultimate user, thus rendering the program a pyramid scheme and a deceptive practice under FTC legislation. In addition, the FTC has charged that Vemma is deceptive in its earnings representations.

FTC vs. Vemma Litigation Bullet Points:

1. (a) This case affirms the BurnLounge standard requiring emphasis on sales to ultimate users, which includes nonparticipant retail customers and personal use in reasonable amounts. Primary motivation for distributor purchases should be destination to ultimate users and not to qualify in the plan for compensation.

See: BurnLounge Appeal Decision: Guidance on Pyramid v Legitimate MLM and the Role of Personal Use in Pyramid Analysis

Jeffrey Babener (2014)

(b)       Contrary to some industry comment, autoship is not under attack, but rather the method of its promotion and implementation and amount, which suggests the primary motivation for purchasing is not for sales to retail customers/ultimate users or reasonable amounts for personal use, but rather to induce purchasing to qualify for commissions in the plan.

(c)        A similar analysis is applicable to up-front, fast-start packages.

2. The FTC alleges several accusations that Vemma is not complying with the BurnLounge standard, and, thus is a pyramid.

(a)       Emphasis not on use or retail but purchasing to qualify.

(b)       Distributors are told to give away product.

(c)        Little evidence of retailing or emphasis on retailing or teaching or training to retail.

(d)       Up-front emphasis on buying fast-start packs of $500-$600, plus sign up for $150 per month autoship to qualify for commissions, rather than servicing an actual need.

(e)       The FTC asserts that the Vemma program emphasis was about distributor purchasing and getting recruits to do the same, rather than sale of product in reasonable amounts for the needs of retail sales and personal use by distributors.

(f)        And the FTC no doubt had complaints from parents of college students, and parent lawyers, for targeting vulnerable college age students with promises of fast wealth from working “the system” of buying and recruiting. The FTC complaint focused heavily on accusing Vemma of abuse by targeting young individuals. Clearly, this is a sore point for the FTC, and it has been a concern of some industry observers even prior to the FTC case. The last time this criticism was made was when Equinox and Trek Alliance were shut by the FTC for the same reasons. In a way, this action is Equinox redux.

3. The FTC does not condemn, nor attack the MLM model (nor personal use), but rather goes out of its way to call out Vemma practices, which it contends makes Vemma an illegitimate pyramid. (See the FTC press release and complaint for FTC’s highly pejorative characterization of the facts.)

“…an alleged pyramid scheme, Vemma Nutrition Company, that lures college students and other young adults with the prospect of getting rich without having a traditional 9-to-5 job.”

‘Rather than focusing on selling products, Vemma uses false promises of high income potential to convince consumers to pay money to join their organization,’ said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection.”

4. Vemma is accused by the FTC of deceptive earnings claims, potentials and hypotheticals as to how distributors could earn substantial income. Vemma published an earnings disclosure, but it was inadequate and deceptive to show the entire picture by limiting disclosure to earnings of active distributors rather than disclosing earnings of all individuals who signed up, of which the vast majority had no income.

5. Autoship: Rumors of its demise are exaggerated. In the future, autoship will continue as a form of orderly ordering… the legal key will be “tracking” how that product is consumed or sold to ultimate users. After the Vemma case, all other cases will demand “tracking” evidence to determine what will clearly become cases that are “fact driven.”

6. As the FTC v. Vemma action unfolds, the outcome will be “fact driven” on the issue of “primary motivation” for distributor purchasing. The FTC has made it clear that it believes that the facts show that Vemma operated a “recruitment” machine that targets college age students with promises of wealth for merely using the system to “buy and recruit” rather than “sell and use,” i.e., per BurnLounge, the product was incidental to the opportunity. The FTC’s complaint does its best to present a factual picture that the Vemma program implementation and distributor purchasing patterns are dominated by “recruitment and qualify” motivation rather than sales to be used by “ultimate users,” whether they be outside retail customers or distributors for personal use.

7. Of course, Vemma will argue a completely different characterization of the facts. Vemma will be obliged to prove the opposite. The “facts” will determine the outcome.

If the FTC allegations on incomplete earnings disclosure are correct, the FTC has a point that merits correction… But certainly not a shut down.

If the FTC is factually supported that distributor purchases are “dead ended” to garages and basements or given away, then there is a real pyramid problem. 

However, if Vemma can demonstrate that distributor purchases actually make their way to “ultimate users,” whether retail customers or personal use in reasonable amounts, then the wholesale ordering mechanisms of fast start packages and autoship subscriptions are not really a challenge for pyramid analysis.
The entire direct selling industry has been offering fast start packages and autoship ordering for a half century. If product is making its way to a destination to be used by ultimate users, then a program is a legitimate direct selling/MLM program, and not a pyramid.

8. How will the facts play out? Without extensive discovery, it cannot be determined at this stage. (Presumably, in its sealed filing, the FTC provided significant fact scenarios to support its position). However, if extensive discovery is needed at this point, a temporary restraining order and preliminary injunction seem inappropriate on the pyramid issue, particularly for a company, Vemma, whose roots, including its predecessor company from which Vemma was “spun out,” New Vision, go back almost 25 years. Nevertheless, this is a reality of this matter. Historically, the FTC has done a good job on the “fact gathering” even though it has been wrong on or misstated the state of pyramid law. (It was roundly rebuked by the U.S. Court of Appeals for the Ninth Circuit for its stated legal position that distributor “personal use” should not be considered in pyramid analysis.)

9. How long will this litigation process take? Had the FTC merely asked for injunctive relief and a preliminary injunction, Vemma would be in a stronger position to see through the litigation. However, the fact that the court ordered an asset freeze and appointed a receiver does not bode well for Vemma. And although a preliminary injunction hearing was set for a very short period of time after the temporary restraining order, case history suggests that most companies, including Vemma, are not prepared to present factual testimony at a preliminary injunction hearing on short notice. The net result is that companies often stipulate to continue the temporary restraining order for months while they gather evidence. And the remainder of the litigation may go on for months or years all the while that a company is shut down and not in control of its assets. Similar scheduling scenarios for companies such as BurnLounge, Fortune High Tech Marketing, Equinox, Trek Alliance, spelled a death knell to the future of those companies, all of whom became “dead man walking.”

In the last two decades, MLM companies, which have been subject to a receiver and asset freeze at the commencement of FTC litigation, have not emerged “alive.” If Vemma survives the process, it may be viewed by some as an outlier. Unless Vemma can immediately compile a mountain of evidence to refute the FTC fact allegations on “product movement,” it is more than an uphill battle.

10. Lessons learned for the future for MLM companies… and for which they should start “yesterday:”

(a) Track product to its final destination. Bottom line, is that companies should be able to document that product makes its way on to and is used by ultimate users.

(b) Marketing emphasis should always be on product first, and opportunity second.

(c) Employ procedures to avoid inventory loading.

(d) Employ procedures to mandate and guarantee retailing.

(e) Do not make claims of wealth, fast wealth, easy money, or sure fire systems, nor effectively invite the FTC to inquire into a program based on earnings hype and systems based on distributor “purchasing” rather than distributor “selling” and “using.”

(f) Do not boldly target demographic markets that the FTC might view as vulnerable to hype and abuse. Such groups may be young people or poor populations.

(g) Do not play fast and loose with earnings disclosures. To be transparent, always indicate the percentage of new sign ups who have no earnings, i.e., what percentage of new distributors actually make money.

In FTC vs. Vemma, who owns the facts?

BurnLounge set the standard for years to come. The decision in case after case, including FTC vs. Vemma, will be “fact driven“… is distributor behavior driven by product sales to the ultimate user or is it driven by recruitment?

In the end, he, who owns the facts, will prevail.

Stay Tuned.

For detailed analysis of the Vemma case and an actual copy of the FTC vs. Vemma lawsuit, please visit www.mlmlegal.com 

Jeffrey A. Babener, of Portland, Oregon, is the principal attorney in the law firm of Babener & Associates. For more than 30 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the Direct Selling Association. He has served as legal advisor to various NYSE direct selling companies, including Avon, Herbalife, USANA, NuSkin, etc. He has lectured and published extensively on direct selling and many of his writings will be found at www.mlmlegal.com , of which he is Editor. He is a graduate of the University of Southern California Law School, where he was an editor of the USC Law Review. Post-USC Law, he served a one-year term appointment as a law clerk to the Hon. David W. Williams, U.S. District Court, Central District of California. Mr. Babener is an active member of the State Bars of California and Oregon. He has served as trial counsel in numerous direct selling cases in federal and state courts for 30 years.

If you are interested in attending the Starting and Running the Successful MLM Company conference visit our conference page, view our speaker list, or get more details. All executives/owners of direct selling companies are welcome to attend. Call 800-231-2162 to register.

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A Conversation with Jeff Babener Video Series: Is cross-sponsoring legal? What rights does the distributor have? What rights does the MLM companies have? Can a company legally ask that distributors only work for one company at one time? Distributors are independent contractors. But companies may lose distributors through raiding. What are your rights? And if cross-sponsoring is legal, is it a good idea?

Watch the video to learn the legalities of cross-sponsoring from both the distributor’s and the company’s perspective. To view more videos in this series, visit MLMLegal.com.

Visit us at www.mlmlegal.com to learn more.

A Conversation with Jeff Babener Video Series: Learn about the difference between the various compensation plans and how distributors are compensated with each plan. It’s called multi-level marketing since distributors are compensated at each level as they recruit more consultants. How many levels are distributors compensated at? Learn about breakaway compensation plans. Learn the difference between sponsors and recruits. Get the definition of each unique compensation plan and which plans are most common and which are less successful. How many levels deep is it most common to go, and legal, to go?

When does a compensation plan become a lottery, which is considered legal by many states? Which programs have stood the test of time, and which have gone by the wayside? Which compensation plan should you choose so that your company is legal and stands the test of time? Learn how to ask the right questions to determine a legitimate operating MLM company vs. a pyramid scheme. Watch the video.

Keep yourself educated on the legal aspects of the MLM industry. Visit MLMLegal.com. Are you starting a MLM company? Make sure you have your legal aspects covered. Contact legal MLM expert Jeff Babener for your free legal consultation today.

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No one better can introduce you to mlmlegal.com better than the man behind it, expert MLM Attorney, Jeff Babener. Speaking to you from the Swiss Alps, Jeff Babener invites you to MLMLegal.com.

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